Reverse earn-out: a seller note that is forgivable if performance declines.
It’s usually named as a “seller note” in the deal documents and sellers view it as a “guaranteed payment” because it doesn’t hinge on a (positive) change in performance.
However, in reality it’s just an earn-out in disguise. It is indeed contingent on future performance.
Where conventional earn-outs qualify based on growth and the realization of upside, the reverse earn-out qualifies in the absence of decline and downside.
The purpose is the same for all types of earn-outs: de-risk the deal, align incentives, and backload payments.
